A future Capital Gain

Hi friends, just needing helpful advice in regard to streaming of a future capital gain please.

Am I best to stream a future capital gain through a trust structure to beneficiaries and use the 50% CGT discount that allows streaming to occur and let them pay the full wack of CGT within the first year.

Or am I better to record the future capital gain inside a company structure which will have a franking/imputation account set up and stream the capital gain at a lower annual dollar in smaller chunks along with the franking credits to that company’s directors over a number of years?

Your advice is appreciated.

 

Depends

A company pays 30% tax whereas an individual could be around 24% after the 50% discount..

But where the shares of the company are held by a discretionary trust the income could be distirbuted to various beneficiaries who have no other income and/or retained and distributed in future years. So possibly little to no tax may be payable.

 

Both individuals personal income tax rate is higher than the 30% company income tax rate. The company has only two shareholders being the same two people listed above.

In regard to franking/imputation accounts I have a few more questions if I may ask please?

1. What’s the process of setting up an imputation account for a regular Pty Ltd entity?

2. What are the rules around how long imputation credits can be claimed/carried forward?

3. Do imputation credits expire?

4. Does it matter if their Capital gains or straight earnings?

5. How do we distribute them out to individuals?

6. Do imputation credits carry their original character (capital gain or income)

7. How does it get calculated and go into the imputation account?

8. Is it the total tax bill or is it something else?

9. Are there any limits on how much of the imputation credit can be distributed?

10. How do you draw down the imputation credits and distribute them?

11. Do you have to be a certain kind of company to have imputation credits account?

12. Once all the imputation credits are used up can the imputation account be closed?

13. What’s the time frames around distributing imputation credits, in a trust they have to be done within the year? Timings?

 

I can't answer your questions but is this asset already owned already?

 

Not yet, it's being acquired soon.

 

Then why are you talking about 2 shareholders?

You have the opportunity to restructure this to suit your needs.

 

I have a pty ltd company that has 2 share holders that I could use to transact the capital gain in or I have a discressionary trust that I could transact the capital gain in. Is it more effective to transact the capital gain in the company and do a distribution to the 2 company share holders over a number of years than just transacting it in the trust and distributing it all within one year?

 

I don't understand the term "transact the capital gain".

Your questions are all over the place.

Regarding companies:

No, profits do not keep their character (income/capital/exempt) in the hands of shareholders. Any tax preferences are 'washed out'.

Companies do not get the CGT general discount but may get small business CGT concessions.

Resident companies are franking entities, see the imputation account in Division 202 ITAA97.

Shareholders are entitled to franking credits when the company franks the dividend paid/credited to the shareholder, subject to comprehensive integrity rules such as streaming.

If the company is making the capital gain as a trustee then it has made no profits and no franking credits arise ... but if there is no beneficiary presently entitled then the trust is taxed at 49% and no CGT discount, etc.

 

When I say "transact", I mean I have the ability to direct the capital gain to occur in my Pty Ltd entity or I have the ability to direct it to occur in a Discressionary trust entity depending on which vehicle legally allows me the lowest overall tax.

 

That doesn't make sense.

Perhaps at this stage you might have the ability to decide which entity will enter the transaction.

 

Omg don't you think you should seek professional advice?

 

If I was making an investment that has a potential future gain I would generally consider a discretionary trust a better investment choice for the following reasons:

- Ability to stream to one or more individuals in an amount that can be determined at that time
- Ability to also stream to a company based on tax issues at that time
- Asset protection / separation v's a trading company

Issues around taxation at a company rate need to balanced v's loss of CGT discounts altogether. Its really not accurate to look at the company tax rate and compare that to individuals and the net rate of tax applying to discount GST events. This is akin to comparing the tax rate in super to individuals also.

However a trust comes at a cost
- Trust setup and duty
- Ongoing compliance costs
- Losses would be quarantined

 

Consider land tax as well. A company may be better in some cases.